Business Capital Expenditures: A Good Leading Indicator?

The Lehmann Letter (SM)

This morning’s news reports advised listeners not to be too disappointed at the July drop in new orders for capital goods. These data are notoriously volatile.

This letter likes to focus on a piece of that report: New orders for nondefense capital goods, because they provide insight into business capital expenditures on plant and equipment.

And today’s announcement from the Commerce Department was not bad:

Business ordered $78.0 billion of new equipment to July.

New Orders for Nondefense Capital Goods

4.1 Nondefense Capital Goods 04-24-13

(Recessions shaded)

Place that number on the chart and you can appreciate its relative strength. It’s true that June orders were an especially robust $92.2 billion. But that’s because of the great volatility of the aircraft component. The data are now close to $80.0 billion even after the setback. That looks good.

The trend is crucial, and the coming months should disclose that trend. The data may be fluctuating within a range or it may climb to new high ground. Because of the data’s volatility, it is too early to know.

That’s why business capital expenditures are such a difficult leading indicator.

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© 2013 Michael B. Lehmann